234 N.W. 764 (S.D. 1931), 6980, State v. Smith

CourtSupreme Court of South Dakota
Writing for the CourtCAMPBELL, J.
JudgeMISER, C., sitting in lieu of ROBERTS, J., disqualified.
Citation58 S.D. 22,234 N.W. 764
PartiesSTATE ex rel. SHARPE, Atty. Gen., et al. v. SMITH, State Superintendent of Banks, et al. (BANK OF GANN VALLEY, Intervener).
Date30 January 1931
Docket Number6980.

Page 764

234 N.W. 764 (S.D. 1931)

58 S.D. 22

STATE ex rel. SHARPE, Atty. Gen., et al.

v.

SMITH, State Superintendent of Banks, et al. (BANK OF GANN VALLEY, Intervener).

No. 6980.

Supreme Court of South Dakota

January 30, 1931

Original proceeding in mandamus by the State, on the relation of M. Q. Sharpe, Attorney General, and others, and an ancillary proceeding by M. Q. Sharpe, Attorney General, on behalf of the State, against F. R. Smith, as Superintendent of Banks within and for the State, and as a member of, and the chairman and treasurer of, the Depositors' Guaranty Fund Commission, in which the Bank of Gann Valley intervened.

Writ of mandamus denied.

Crawford & Crawford and Charles P. Warren, all of Huron, Paul M. Young, of Mitchell, M. Q. Sharpe, Atty. Gen., and R. F. Drewry, Asst. Atty. Gen., for petitioners.

Page 765

Herbert E. Hitchcock, of Mitchell, T. B. Thorson and O'Keeffe & Stephens, both of Pierre, for defendants.

Roy E. Willy, of Sioux Falls, and Churchill & Benson, of Huron, for intervener.

CAMPBELL, J.

This case involves the determination of the present situation in this state with reference to the law relating to the guaranty of deposits in banks operated under the control and supervision of the state of South Dakota. The nature of the present proceeding is an original application in this court for mandamus, as will be more fully stated hereinafter. Any intelligent consideration of the problems here presented necessarily requires, as all parties to this proceeding point out in their briefs, a consideration of the history of the Bank Guaranty Law in this state and of operations thereunder, and the present status of conditions pertaining to such law. It requires also some contemplation of the political, economic, and historical background whence the Bank Guaranty Law emerged. We will therefore attempt to deal somewhat with these matters before undertaking to state the exact issues involved in the present proceeding.

Perhaps the earliest movement in the United States for the guaranty of bank deposits, as pointed out in several of the briefs filed herein, was in the state of New York in 1829, when there was inaugurated the so-called "Safety Fund Banking System." In those days the principal form of circulating bank credit was not, as it is to-day, checks, drafts, etc., representative of a deposit credit, but consisted of bank notes. The object and intention of the New York law was to provide

Page 766

adequate security for circulating bank credit in the form of bank note issues. The law was sufficiently broad in its terms, however, to embrace within its guaranty provisions, not only the note issues of banks, but all debts of banks. Numerous bank failures occurred in New York as a result of the panic of 1837, and the debts of the failed banks (as contradistinguished from their outstanding note issues) were so great that the safety fund system completely broke down and collapsed under the strain. Similar experiments were inaugurated at about the same time in Michigan and in Vermont, but none of these early experiments were successful or continued long in operation.

The movement which resulted in the enactment of the South Dakota law for the guaranty of bank deposits, however, is of comparatively recent origin. Perhaps no one has made a more careful, comprehensive, and sympathetic study of the bank guaranty movement than Professor Thomas Bruce Robb of the Department of Economics of the University of Missouri, later of the University of Nebraska. In his book "The Guaranty of Bank Deposits" (Boston, Houghton Mifflin Co., 1921) he says (page 20):

"The Safety-Fund Banking Law of 1829 was the first application of the bank-guaranty idea in this country. But, as already pointed out, deposit guaranty was not intended to be a part of the scheme and it was abandoned after the panic of 1837. This experiment seems to have been forgotten, and it is doubtful if it had any connection whatever with the revival of the idea in the West nearly a century later. There is record of a few scattered attempts of associated banks to insure mutually their deposits. In Georgia and Florida there is a group of about a hundred banks which has a Mutual Depositors' Guaranty Fund to protect deposits, but such attempts have attracted little attention. Bank-deposit guaranty as we know it to-day seems to have been associated with the Populist movement of the west-central states. In Nebraska during Populist days there was continual agitation, and at one session of the legislature a serious attempt was made to pass a bank-guaranty law. John W. Breidenthal, a Populist bank commissioner of Kansas, urged such a law in his Report of September 1, 1898. Governor Leedy, a Populist governor of Kansas, called a special session of the legislature, and the bill that was presented passed the State Senate and lacked only four votes of passing the House of Representatives.

"The cause of this early agitation is not far to seek. In the strongholds of Populism the days of the protracted depression of 1893 were especially trying times. One crop failure had followed another in rapid succession. Many of the assets of the banks were in the form of boom paper held over from the years 1886 and 1887. The serious crop failures soon squeezed the inflated values out of this paper with the result that almost every other bank found itself practically insolvent. The numerous bank failures of this period worked incalculable hardship, and the Populist bank-guaranty agitation was the reflection of this distress. In 1897 a turn for the better came. A series of bountiful crops, in conjunction with other favorable conditions, was a boon to that section of the country. By 1900 the whole country was well launched on the upward swing of a modest boom and the Populist movement and the bank-guaranty agitation went out together."

Again, in 2 Encyclopaedia Social Sciences (MacMillan Co., New York, 1930), Mr. Robb epitomizes the general situation as follows:

"The guaranty system of protection was offered as a concrete plan during the epidemic of bank failures following the panic of 1893. At that time other types of bank protection were poorly developed; standards of banking supervision were rather low, and in a number of states banks were not required to maintain reserves. Deposit guaranty became one of the objectives of the Populist party and in the west central states serious attempts were made to enact guaranty laws. With the return of prosperity the idea was forgotten, but it was brought forward once more during the panic of 1907, when the proposal became so popular that in the following year it was incorporated as a plank in the platform of the Democratic party. It was opposed, however, by many bankers; those connected with well established banks were particularly antagonistic, claiming that it was unfair to make their institutions pay for the recklessness of small and new banks. Moreover, national banks, being excluded from these state guaranty schemes and fearing the competition of state banks, also objected.

"Oklahoma became a state three weeks after the panic of 1907 had set in and within the next month passed a bank guaranty law. Similar laws were enacted in Kansas (1909), Nebraska (1909), Texas (1909), South Dakota (1909), Mississippi (1914), Washington (1917) and North Dakota (1917). The laws, although differing greatly in detail, were similar in general outline. In most cases all deposits not otherwise secured were protected. A guaranty fund, totaling either a percentage of protected deposits or a stated amount ranging from a half million to five million dollars, was provided by assessing each bank a percentage of its average daily deposits. Provision was usually made for raising special assessments in emergencies. If the fund became depleted through losses interest bearing certificates based upon its credit were provided for in most states; these were to be liquidated in normal times by assessments. A state banking board, which included the state bank commissioner, was usually

Page 767

charged with collecting the fund and administering the law. One of its most important functions was the supervision of the closing of insolvent banks and the payment of depositors. When all the available assets of a bank that had failed were exhausted, the balance due to depositors was paid out of the guaranty fund. These guaranty systems were made compulsory except in Kansas and Washington. In Texas the banks were given the choice of either using the usual state mutual insurance fund or furnishing a bond for the protection of depositors."

With this survey of the larger picture of which bank guaranty in South Dakota forms a part, we turn to the particular situation in this state.

The first law in South Dakota relating to the guaranty of bank deposits was chapter 299, Laws 1909, which was a scheme entirely voluntary in nature so far as the banks were concerned. The act was not to be effective until such time as one hundred existing state banks, with an aggregate capital of at least $1,000,000 should establish their eligibility to membership in a voluntary guaranty association, pay their membership fees, premiums, etc., and take the necessary steps to form and inaugurate the association. This condition was never fulfilled. The association never came into being, and the law was never availed of. Public clamor for guaranty of bank deposits continued, however, and in 1915 there was enacted in this state our first real law for guaranty of bank deposits as article 3 (sections 1 to 28) of chapter 102, Laws 1915.

The guaranty fund law of 1915 became a part of the South Dakota Revised Code of 1919 (sections 9005 to 9031, inclusive) without any intervening change, excepting that by chapter 143, Laws 1917, sections 6, 16, and 26 of the original act, which became respectively sections 9010, 9020, and 9029, Rev. Code...

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